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Samsung stock meltdown attracts investors on survival bets

The debacle that sent Samsung Electronics Co to its biggest three-day stock rout since 2012 isn't scaring TT International (HK) Ltd and Skagen AS from South Korea's biggest company.

PHOTO: BLOOMBERG

[SEOUL] The debacle that sent Samsung Electronics Co to its biggest three-day stock rout since 2012 isn't scaring TT International (HK) Ltd and Skagen AS from South Korea's biggest company.

"Samsung offers exceptional value; we have added to our position," said Duncan Robertson, a portfolio manager at TT International, whose Asia Pacific Equity Fund beat 90 per cent of peers over the past year with a 21 per cent annual return.

"The battery issue can only be a long-term threat if the company doesn't take the correct steps to restore its brand. We have confidence that they have taken the correct steps so far."

Foreign investors are braving the widest share volatility in five years after a three-day rout shaved about US$23 billion off Samsung's market value, more than the size of Sri Lanka's stock market. Troubles at the company, whose shares command a 17 per cent weighting on the benchmark Kospi index, come amid an already fragile Korean market.

Overseas funds have pulled US$800 million this week from the nation's equities as prospects for higher US borrowing costs weigh on emerging markets.

On Tuesday, the world's biggest phone maker said it is ending production of its problematic Galaxy Note 7 smartphones, taking the drastic step of killing off a device in one of the deepest crises in its history.

It had already recalled the Note 7 once last month after early models exploded and the latest move comes after customers reported that replacement phones were also catching fire.

"Samsung will come out of this episode relatively unscathed. Any impact would be temporary," Kar Tzen Chow, a Kuala Lumpur-based fund manager at Affin Hwang Asset Management Bhd, which oversees about US$7.6 billion, said by phone. "It will survive this episode and move on." He said he's looking at the current price weakness to buy more shares.

The shares sank 0.7 per cent on Wednesday, bringing the three-day slump to 10 per cent, the most since May 2012, after reaching a record high last Friday. They plunged 8 per cent Tuesday. The declines dragged valuations to near the cheapest level in eight months. The stock climbed as much as 1.7 per cent on Thursday.

"The recent pullback in the share price offers an attractive entry point, a buying opportunity, for long-term investors," said Knut Gezelius, a fund manager at Norway's Skagen. "We believe the battery issue in Samsung most likely is a short-term issue with limited impact on the intrinsic value of the company."

Not everyone is optimistic. The uncertainty over its brand reputation and reliability amid rising competition would be a big challenge to overcome, according to Samir Mehta, a Singapore-based senior fund manager at JO Hambro Capital Management. The stock isn't cheap enough yet to buy, he said.

Samsung will suffer financially from halting production, as it will lose revenue from a flagship device, but the main long-term impact will be on its brand and reputation, according to a BMI Research report.

The Korean company on Wednesday cut its outlook for third-quarter operating profit and sales. Profit will be 5.2 trillion won (S$6.4 billion) instead of 7.8 trillion won in the period, the company said in a regulatory statement. Revenue will be 47 trillion won instead of 49 trillion won.

"It seems to be difficult for the company to overcome this issue immediately. Given the facts that I have, the company is unlikely to post solid earnings for the fourth quarter," Chaiwon Lee, chief investment officer at Korea Value Asset Management Co, said in Seoul.

"I feel like the company has lost its earnings momentum now." He declined to comment on whether he will buy or sell Samsung shares.

Before this week, Samsung shares were up more than 50 per cent from a January low. The stock rallied last week after preliminary results showed operating profit topped analysts' projections and activist investor Paul Elliott Singer advocated breaking up the company and pay shareholders a special dividend.

The stock is "trading close to book value now. This is a very attractive valuation right now," said David Gaud, a senior portfolio manager at Edmond de Rothschild Asset Management in Hong Kong.

"We'd expect the share price to be weak in the near future, because they've done very well in the past months. There will be some profit-taking, but we'd seek for opportunities to re-enter the stock or buy more into the stock."